LESSON 1.1 The Economic Problem Recognize the economic problem, and explain why it makes choice necessary. Identify productive resources, and list examples. Define goods and services, list examples, and explain why they are scarce. Objectives

What is Economics? Study of the choices that people make to satisfy their needs and wants. Needs Wants Microeconomics (Market Economics) Macroeconomics ( National Economics )

Economic Decisions What are economic decisions based on? Needs: things people have to have to survive Wants: things people would like to have

Economic Choices and Scarcity Unlimited needs and wants vs. Limited resources = Scarcity

Economic Choices The economic problem Scarcity is the condition facing all societies because there are not enough productive resources to satisfy people’s wants and needs. Productive resources are the inputs used to produce the goods and services that people want and need.

Productive Resources Natural Resources Human Resources Capital Resources Entrepreneurship

Human Resources Human resources is the broad category of human efforts, both physical and mental, used to produce goods and services. (Ex: Labor is the physical and mental effort used to produce goods and services.) An entrepreneur tries to earn a profit by developing a new product or finding a better way to produce an existing one.

Natural Resources and Capital Goods Natural resources are “gifts of nature” including land, forests, minerals, oil reserves, bodies of water, and animals. Capital goods include all human creations used to produce goods and services.

Economic Decisions Who makes economic decisions? Consumers: People who buy things to satisfy their needs/wants Producers: People who make things to satisfy other peoples wants/needs

Goods and Services Goods A good is tangible—something you can see, feel, and touch. Services A service is intangible—not physical—yet uses scarce resources to satisfy human wants.

No Free Lunch All goods and services involve a cost to someone, and draw scarce resources away from the production on other goods. A good or service is scarce if the amount people desire exceeds the amount available.

Three Basic Economic Questions What to produce? How to produce it? For whom to produce?

How Do We Deal with Scarcity? Increase productivity/efficiency Division of labor/specialization

The Role of Economic Theory An economic theory is a simplification of economic reality that is used to make predictions about the real world

Marginal Analysis Compare marginal cost with marginal benefit Choice requires time and information Market economics and national economics

Market Participants Four types of participants in markets: Households Firms Governments The rest of the world

Markets Markets are the means by which buyers and sellers carry out exchange. Product markets Resource markets Labor market

A Circular-Flow Model A circular-flow model describes the flow of resources, products, income, and revenue among economic decision makers.

Circular-Flow Model

Opportunity Cost The opportunity cost of an item or activity is the value of the best alternative you must pass up. (also can be called the opportunity lost) Trade-offs: what you sacrifice in order obtain another product.

Opportunity Cost People always do what they do be/c they had nothing better to do. Estimate opportunity cost (Individual) Opportunity cost varies among everybody

Choose Among Alternatives Calculate opportunity cost Time—the ultimate limitation Ignore sunk cost Sunk cost is a cost you have already incurred and cannot recover.

The Opportunity Cost of College Forgone earnings Direct costs of college Other college costs Other-things-constant assumption